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DETERMINING  CREDIT 

A  SUGGESTIVE  METHOD  FOR  CREDIT 
COMMITTEES  OF  CREDIT  UNIONS 

DEVISED  BY 

R.  S.  HALE 

SUPERINTENDENT,    SPECIAL   RESEARCH  DEPARTMENT 

THE   EDISON   ELECTRIC    ILLUMINATING   CO. 

BOSTON,    MASS. 


''^6 


AND  NOW  USED  BY 
THE  INDUSTRIAL  CREDIT  UNION,  BOSTON.  MASS. 


Division  of  Remedial  Loans 

Russell  Sage  Foundation 

130  East  22nd  Street,  New  York  City 


May,  1916 


SOME  PUBLICATIONS  ON  COOPERATIVE  CREDIT 

ISSUED  BY 

RUSSELL  SAGE  FOUNDATION 

No.  5.  Cooperative  Credit.  A  Selected  Bibliography.  Bulle- 
tin of  Russell  Sage  Foundation  Library,  June, 
1914.     (5  cents.) 

RL  15.  A  Credit  Union  Primer.  By  Arthur  H.  Ham  and 
Leonard  G.  Robinson. 

Contains  a  brief  history  of  cooperative  credit,  a  defini- 
tion of  its  field  in  the  United  States,  an  outline  of 
the  elementary  principles  of  credit  unionism,  together 
with  model  by-laws,  necessary  books  and  forms, 
instructions  for  organizing,  and  the  New  York  credit 
union  law. 

Division  of  Remedial  Loans.    79  p.    1914.     (25  cents.) 

RL  16.     The  Cooperative  People's  Bank.     By  Alphonse  Des- 
jardins. 
The  evolution  of  the  cooperative  bank,  the  Canadian 

system,  its  growth  and  accomplishments. 
Division  of  Remedial  Loans.  42  p.  1914.  (15  cents.) 

RL  19.  Credit  Unions  and  their  Relation  to  Savings  and  Loan 
Associations.     By  Arthur  H.  Ham. 

An  address  delivered  before  the  State  League  of  Sav- 
ings and  Loan  Associations,  Port  Jervis,  N.  Y.,  June 
10,  1915. 

Division  of  Remedial  Loans.  12  p.  1915.  (Single 
copies  free.) 


DETERMINING  CREDIT 

Treasurers  and  credit  committees  of  credit  unions  have  al- 
ways before  them  the  necessity  of  deciding  whether  a  loan  can 
safely  and  properly  be  made,  and  whenever  applications  for  loans 
exceed  the  funds  on  hand,  they  must  decide  which  of  the  loans  are 
to  be  made  at  once  and  which  are  to  be  laid  aside. 

The  statutes  provide  two  rules:  first,  that  all  loans  must  be 
for  a  provident  purpose,  and  second,  that  preference  shall  be 
given  to  the  smaller  loans.  These  rules,  however,  do  not  answer 
all  questions  that  arise,  and  are,  besides,  somewhat  difficult  to 
apply.  Every  application  for  a  loan  must  be  considered  from 
the  following  points  of  view: 

1.  Purpose  of  the  loan 

2.  Record  of  the  applicant 

3.  Security  offered 

Purpose  of  the  Loan 
The  statutes  provide,  and  it  is  laid  down  in  the  by-laws  of 
most  credit  unions,  that  the  purpose  of  each  loan  must  be  ascer- 
tained and  the  loan  shall  not  be  granted  unless  it  promises  to 
benefit  the  borrower.  A  loan  may  be  considered  of  benefit  to  the 
borrower  when  made  to  enable  him 

a.  To  buy  for  cash  instead  of  upon  credit 

b.  To  buy  in  large  instead  of  in  small  quantities 

c.  To  pay  bills  incurred  on  account  of  illness 

d.  To  expand  his  business 

e.  To  keep  up  premiums  on  a  life  insurance  policy 

f.  To  pay  taxes  or  assessments  on  his  house 

g.  To  meet  any  legitimate  expense  occasioned  by  emer- 
gencies or  to  effect  a  saving. 

A  loan  may  not  wisely  be  made  to  enable  a  member  to  in- 
crease his  expenditures  beyond  his  expected  income,  but  it  is 
desirable  to  loan  to  a  member  to  enable  him  to  get  out  of  the 
clutches  of  the  loan  shark,  even  though  his  original  borrowing 
from  the  loan  shark  was  due  to  improvidence  or  unwise  expendi- 

3 


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ture.  In  most  cases  the  credit  committee  should  seek  to  ascer- 
tain not  only  the  purpose  of  the  loan,  but  the  use  which  the  bor- 
rower intends  to  make  of  his  present  and  expected  income  from 
whatever  source.  Borrowers  need  not  always  be  required  to 
give  the  intimate  details  of  their  financial  and  domestic  situation, 
but  when  full  information  is  given  loans  can  be  made  with  more 
safety. 

Record  of  the  Applicant 

Before  granting  a  loan  the  credit  committee  should  obtain 
as  full  answers  as  possible  to  the  following  questions : 

a.  How  long  has  the  applicant  been  in  his  present  employ- 
ment? 

b.  How  long  in  former  position? 

c.  How  long  has  he  lived  at  his  present  address? 

d.  How  long  at  former  address? 

e.  How  long  has  he  been  a  member  of  the  credit  union? 

f .  How  regularly  has  he  saved  money  in  the  union  or  in  other 
ways? 

g.  How  promptly  has  he  paid  his  debts  in  the  past,  including 
former  loans  from  the  credit  union  and  outside  obligations? 

h.  Is  he  married  and  how  many  are  dependent  upon  him? 

i.    What  are  his  personal  habits? 

j.   Of  what  clubs  and  societies  is  he  a  member? 

Security 
The  character  of  the  applicant  as  shown  by  his  record  and 
the  purpose  of  the  loan  is  largely  the  security  upon  which  the 
loan  is  made.  Many  loans,  however,  are  additionally  secured 
by  the  endorsements  of  fellow-members  or  non-members  and  by 
collateral  security. 

a.  Collateral 
The  best  collateral  security  that  a  credit  union  can  obtain  is 
the  applicant's  share  holdings  in  the  union.  It  may  also  accept 
as  collateral  security  for  a  loan  a  savings  bank  book,  a  mortgage 
of  real  estate,  a  chattel  mortgage,  an  assignment  of  wages,  a 
life  insurance  policy  having  a  certain  cash  value,  or  marketable 
securities. 

b.  Endorsements 
The  value  of  endorsements  upon  a  borrower's  note  is  deter- 
mined by  an  examination  of  the  record  of  the  endorser  in  the 

4 


same  manner  as  the  applicant's  record  is  appraised.  The  best 
endorsers  are  members  of  the  union  who  own  a  fair  number  of 
shares.  Though  their  share  holdings  may  not  equal  the  amount 
of  the  loan  they  increase  the  security,  for  endorsers  will  use  every 
effort  to  have  the  loan  paid  in  full  rather  than  lose  their  own 
money.  Endorsers  should  be  independent  of  each  other  and  of 
the  borrower.  A  wife,  brother  or  partner  of  a  borrower  is  not  as 
valuable  an  endorser  as  a  person  not  related  to  or  connected  with 
him,  for  the  same  accident  or  illness  that  makes  it  difficult  for 
the  borrower  to  pay  may  handicap  an  endorser  who  is  related  to 
him. 

In  a  credit  union  having  a  small  homogeneous  membership  in 
which  the  credit  committee  is  acquainted  with  every  member  it 
is  not  necessary  for  each  appHcation  to  be  appraised  in  great 
detail,  but  in  many  credit  unions  there  will  be  members  who  are 
not  personally  known  to  the  credit  committee  and  the  committee 
should  have  a  working  plan  to  enable  it  to  determine  with  fair 
accuracy  the  credit  to  which  each  applicant  is  entitled  and  the 
relative  merits  of  the  several  applications  filed  with  the  com- 
mittee. The  decision  must  in  the  last  analysis  be  based  upon 
the  judgment  of  the  treasurer  and  the  credit  committee — it  is  a 
matter  that  can  never  be  handled  by  rule-of -thumb.  But  in 
order  to  systematize  the  operation  of  passing  upon  applications 
and  minimize  the  labors  of  the  treasurer  and  credit  committee 
the  following  plan  has  been  worked  out  by  the  Industrial  Credit 
Union  of  Boston.  The  total  points  required  and  the  point 
allowance  for  each  item  have  been  changed  several  times  since 
the  system  was  adopted,  and  further  changes  will  doubtless  come 
as  more  experience  is  acquired.  The  scale  is  not  to  be  considered 
as  complete,  but  it  indicates  the  essential  factors  that  must  be 
considered  in  making  a  loan  and  suggests  what  seems  to  be  a 
practical  method  of  determining  the  amount  of  credit  that  may 
safely  be  extended  to  each  member.  The  value  of  the  system  is 
not  that  it  determines  credit  accurately,  but  that  it  helps  the 
treasurer  and  credit  committee  to  form  their  judgments.  It  is 
to  be  hoped  that  credit  committees  which  make  use  of  this 
method  will  suggest  such  changes  as  seem  to  them  to  be  neces- 
sary in  order  that  a  satisfactory  working  plan  of  general  applica- 
bility may  be  evolved. 


100 

Max.  points 
allowed 


20 


Point  System  of  Determining  Credit 
Minimum  number  of  points  required 

A.  Loans  on  collateral  security 

1.  Purpose  10 

(If  it  is  certain  that  the  loan  will  effect  a  saving  or  benefit 
for  the  borrower,  allow  maximum  points;  if  not,  allow 
fewer  points.  If  the  borrower  is  spending  or  planning  to 
spend  an  undue  amount  for  luxuries,  negative  points 
should  be  charged  against  him.) 

2.  Collateral  90 

a.  Member's  paid-up  shares  equivalent  to  loan 

b.  Savings  bank  books  or  life  insurance  policies 
with  surrender  value 

c.  Stock  market  collateral  with  good  margin 

d.  Real  estate,  first  mortgage 

e.  Chattel  mortgage 

3.  Past  record 

Either  one  of  the  following: 

a.  Record  (outside  credit  union): 

1.  Payment  of  debts 
(Evidenced  by  receipted  bills) 

2.  Savings  or  investments 

b.  Record  (in  credit  union) : 

1.  Payment  of  loans 

2.  Savings,  last  year 

3.  Savings,  year  before  last 

Total  120 

B.  Loans  without  collateral  security 

1.  Purpose  (see  above,  A  1)  10 

2.  Proportion  of  loan  to  income  10 

(If  no  larger  than  weekly  income,  give  maximum  points.) 

3.  How  long  in  present  position  or  with   present 
employers  10 

(1  point  a  year,  maximum  10) 

4.  How  long  with  last  employer  10 

(1  point  a  year,  maximum  10) 

5.  Housekeeping  or  boarding  5 

(A  man  keeping  house  is  a  better  risk  than  one  who  is 
boarding.     If  the  former,  give  maximum  points.) 

6.  How  long  living  at  present  address  10 

(1  point  a  year,  maximum  10) 
6 


90 

80 

75 
75 
20 


10 

10 

10 
5 

5 


7.  How  long  at  last  address  10 

(1  point  a  year,  maximum  10) 

8.  How  many  legal  dependents  5 

(A  man  without  dependents  should  ordinarily  be  able  to 
pay  his  debts,  but  a  married  man  with  children  is  usually 
a  better  risk.  For  five  dependents,  give  maximum  of  5 
points  and  1  point  less  for  each  less  or  greater  number.) 

9.  Life  insurance :  10 

a.  What  company 

b.  Kind  of  policy 

c.  Amount 

d.  How  long  in  force 

e.  Any  outstanding  loans  against  it;  if  so,  what 
amount 

10.  Present  financial  condition:  10 

a.  Assets 

b.  Liabilities 

11.  Personal  habits  and  reputation:  10 

a.  Good  health  5 
(Frequent  illness  is  bad  from  a  credit  point  of  view 
even  though  not  the  fault  of  the  applicant.) 

b.  Membership  in  organizations:  5 

Fraternal,  church,  militia,  clubs,  etc. 

(Most  fraternal  bodies  investigate  before  electing  mem- 
bers and  if  a  man  has  been  favorably  passed  upon 
in  this  manner  he  is  a  better  risk  for  a  credit  union. 
Allow  maximum  jK)ints  if  habits  and  reputation  are 
very  good  and  from  that  down  to  zero  and  even  negative 
points  in  case  unfavorable  reports  are  obtained.) 

12.  Past  record:  20 

Either  one  of  the  following: 

a.  Record  (outside  credit  union): 

1.  Payment  of  debts  and  loans  10 
(Allow  maximum  points  if  record  of  payment  of 
debts  is  very  good.     If  record  is  not  good  allow 
fewer  points  or  even  charge  negative  points.) 

2.  Savings  or  investments  10 

b.  Record  (in  credit  union) : 

1.  Payment  of  loans  10 

2.  Savings,  last  year  5 

3.  Savings,  year  before  5 

Total  120 


Endorsers 

Having  given  the  applicant  a  point  rating  endorsers  offered 
should  be  rated  in  the  same  manner,  an  allowance  being  made,  as 
in  the  case  of  borrowers,  for  any  share  capital  which  becomes 
collateral  for  the  loan.  An  effort  should  be  made  to  see  that 
there  is  no  collusion  between  the  borrower  and  the  endorser — 
that  the  borrower  does  not  give  any  part  of  the  loan  to  the  en- 
dorser and  that  the  endorser  is  actually  risking  his  own  money. 
If  the  endorser  is  a  close  connection  of  the  borrower,  such  as 
wife,  son  or  partner,  credit  the  endorser  with  only  one-quarter 
of  the  points  that  would  be  allowed  if  such  relation  did  not  exist. 

Illustration:  John  Jones  applies  for  a  loan  of  $50  having  no 
collateral  to  offer  as  security.     He  would  be  rated  as  follows: 

Points 
allowed 

1.  To  pay  doctor's  bill  5 
(The  allowance  is  not  as  great  as  if  he  were  to  buy  coal  in 

the  spring  or  summer,  but  more  than  if  the  money  were  to 
be  spent  for  luxuries.) 

2.  Income  $25  per  week  5 

3.  Ten  years  with  present  employer  10 

4.  Four  years  with  last  employer  4 

5.  Keeps  house  5 

6.  Has  lived  in  the  same  house  for  four  years  4 
Four  years  at  former  address  4 
Four  legal  dependents  4 
Has  no  life  insurance  0 
Has  no  outstanding  debts  and  current  bills  are  paid 
to  date  except  that  for  which  this  loan  is  desired. 
No  assets  except  household  furniture  5 

a.  His  own  health  and  that  of  his  family  is  generally 
good.     This  bill  is  for  an  operation  5 

b.  Mason  and  church  member  5         10 


7. 

8. 

9. 

10. 


11 


12.  Has  been  in  the  credit  union  1  year  and  saved  $20 
out  of  an  annual  income  of  $1,300.  No  record  as  to 
previous  saving  in  other  ways.  No  judgments  filed 
against  him.  Apparently  pays  bills  promptly  though 
information  not  full  on  this  point 

Total 


12 
68 


As  these  points  do  not  count  up  to  100 — the  minimum  points 
required — a  loan  of  this  amount  should  not  be  made  without  an 
endorser.  One  good  endorser,  even  if  related  to  the  applicant, 
would  bring  the  point  allowance  up  to  the  minimum  required. 

8 


5930S8 


K2^ 


UNIVERSITY  OF  CALIFORNIA  UBRARY 


^N  INITIAL  ^^^on-o  ?S 

DAY     AND    TO    $1"  ^^^^^^^ 

OVERDUE.  ' 


